US to raise rate in inflation war

AMERICA'S post-election hangover is expected to kick in on Wednesday with an interest rate increase to ward off a rise in inflation.

The US Federal Reserve Board is likely to push up borrowing costs from 1.75% to 2%, with rates forecast to reach 5% by the end of 2006.

Any hope that the Fed would hold fire ended on Friday when American labour market figures showed employers had created 337,000 new jobs in October, the highest level since March and double what was expected.

With the dollar weakening on foreign exchanges and both the federal government deficit and the trade deficit hitting record levels, the Fed fears a resurgence of inflation as a consequence of renewed economic buoyancy.

The dollar dropped to a nine-year low late last week, while the federal government deficit now stands at $413 billion (£224.5 billion), equivalent to 3.7% of gross domestic product. The US trade deficit with the rest of the world is expected to be $640 billion (£348 billion), equivalent to 5.7% of GDP.

Most analysts in Britain expressed bewilderment at how far stock markets have jumped since the election result. The Dow Jones gained 3.8% in the past week, ending on Friday at 10,387, while the FTSE 100 has risen almost 2.5% to 4,740, its highest since June 2002.